Reference no: EM132325972
Question
Belvenie Company has competed for many years in product lines that have recently experienced a great increase in global competition.
These products have long been dominated by U.S. firms. The company has no foreign operations and few personnel with experience in international trade.
The company has made a few product changes in recent years and is not actively engaged in product innovation or research and development.
The following information is selected from the company's financial statements and notes for the period 2012 to 2014 ($000):
a 2012 2013 2014
Net income $60,000 $40,000 $3,500
Net accounts receivable (ending) 30,000 12,000 5,000
Inventory (ending) 19,000 14,000 8,000
Net cash inflow from operations 15,000 7,000 1,500
Capital expenditures 9,000 7,000 4,000
Proceeds from sale of plant assets 15,000 10,000 35,000
Net gain on sales of plant assets 16,000 12,000 25,000
The company also did the following:
1. Recently negotiated with banks to extend payment terms on short-term loans.
2. Maintained very low levels of accounts payable during this period.
3. Held significant investments in corporate bonds (interest revenue on bonds in 2014 was $3,000).
4. Paid no dividends during this period.
5. Issued no stock or bonds during this period.
Belvenie Company Statement of Cash Flows For the Year ended December 31, 2014
Cash flows from operating activities:
A
A
Net income
$3,500
A
Items reconciling net income to net cash flows from operating activities:
A
Accounts receivable decrease
7,000
A
Inventory decrease
6,000
A
Extraordinary loss, building fire
12,000
A
Dividends received (equity investment)
8,000
A
Investment revenue (equity investment)
(14,000)
A
Gains on sales of plant assets
(25,000)
A
Depreciation, amortization
4,000
A
Net cash inflow from operating activities
A
$1,500
A
A
Cash flow from investing activities:
A
A
Purchase of plan assets
($4,000)
A
Insurance proceeds on building fire
20,000
A
Sale of plant assets
35,000
A
Purchase of corporate bonds
(5,000)
A
Purchase of corporate stocks
(10,000)
A
Net cash inflow from investing activities
A
36,000
A
A
Cash flows from financing activities:
A
A
Principal payments on short-term notes to financial institutions
($15,000)
A
Purchase of treasury stock
(6,000)
A
Net cash outflow from financing activities
A
(21,000)
A
a
Net cash increase
A
$16,500
Beginning cash balance
A
12,000
Ending cash balance
A
$28,500
Required:
Provide an interpretation of the company's statement of cash flows in light of its situation. Consider ethical matters in the context of company strategy and financial disclosure.